Update | China's Citic Pacific foreign exchange trades ‘out of control’ before ringing up massive losses
Market Misconduct Tribunal hearing shows company given clean bill of health despite risks in hedging product which led to Citic being on the hook for HK$14.7 billion
Citic Pacific’s foreign exchange hedging was “out of control”, a former company director and defendant in a Market Misconduct Tribunal hearing in Hong Kong wrote in an email several weeks before Citic issued an exchange filing giving it a clean bill of health, the tribunal heard on Wednesday.
Writing on August 30, 2008, to then assistant director of finance Simon Chui Wing-nin, Citic director Leslie Chang Li-hsien flagged the firm’s mounting exposure to a type of hedging product known as a target redemption forward contract, writing: “I am really concerned about the position we are in ... it is out of control.”
Over several weeks from August onwards, Chang asked Chui and his colleagues to do regular “sensitivity analysis” as Citic’s exposure to the contracts totalled A$6.5 billion.
These contracts allowed Citic to lock in a favourable US dollar-Australian dollar exchange rate so long as the market spot rate did not fall below the contract’s strike rate. That’s exactly what happened at the height of the financial crisis, leaving Citic on the hook for HK$14.7 billion owed to counterparties on the other side of the contracts.
Did you put in place any cautionary system to ensure downside risk didn’t creep up on you?
Counsel for the city’s securities regulator, the Securities and Futures Commission, are arguing that Citic directors were “reckless” and “negligent” to sign off on an exchange filing dated September 12, 2008, that made no mention of the mounting losses.
